A legal oddity in the Employment Relations Amendment Bill - Contract of Employment

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The Employment Relations Amendment Bill, introduced last week, contains a legal oddity that sits outside the normal constructs of commercial law and which we hope the lawmakers will reconsider before the Bill is passed.

This is the 'implied warranty' the Bill proposes to prevent unsuccessful contractors pushing higher labour costs on to their successful competitor, through the special protections attached to 'vulnerable employees'.

We explain what the proposed change is designed to achieve and why it is both unnecessary and undesirable.

Alice in Wonderland

The employment jurisdiction's intersection with common law is an 'Alice in Wonderland' sort of place, where things do not mean what they say, or others collaborate to give them meanings that make no sense.

Some can be articulated as tests for logical fallacies: every employee is employed under an employment agreement; employees subject to collective agreements are not employed under individual employment agreements; collective agreements are not employment agreements. So what is the term for the contract by which employees subject to collective agreements are employed?

The Employment Relations Act (ERA) in its original drafting rode rough-shod through some long-established common law principles – for example, on restraints of trade and on confidentiality – while at the same time professing to adopt them, leading both to judicial creativity and subsequent corrective amendments.

Neither is desirable, if certainty of obligation is an accepted goal. The new Employment Relations Amendment Bill suggests the lesson has yet to be learned.

When Alice ventures beyond Wonderland

The employment jurisdiction comes unstuck when it sticks its head out of its own specialism, and starts interfering in the broader commercial world, solidly established by well-comprehended legal principle.

This intersection can arise in some mergers and acquisitions, when the ERA requires that the successful contractor must offer new employment to 'vulnerable employees', "on the same terms and conditions" as apply in their current employment.

These 'vulnerable employees' are largely in the cleaning and food catering industries where – competition being what competition is, "by its very nature deliberate and ruthless"¹ – some unsuccessful contractors, with an eye to a longer-term horizon, have apparently been trying to hobble their replacements by radically improving departing employees' entitlements, so as to burden their successful competitor with them.

At least, that is the implication to be taken from the Employment Relations Amendment Bill's proposed prohibition of a current employer changing either the vulnerable employees' work, or the terms and conditions on which they are employed to perform it, in advance of their transfer to a new employer.

So far, so unremarkable

But the Bill proposes to achieve this legislative end by establishing "an implied warranty by the employees' employer to the new employer that the employees' employer has not, without good reason, changed... the work affected by the restructuring" or the terms and conditions of employment on which it is performed.

Warranties are typically collateral to the principal object of the underlying contract, in that they provide a means of completing that which is not known to (or deemed not to be known to) the party to whom the undertaking is extended.

Where the parties have unambiguously recorded the terms of a warranty, the success of the claim is dependent upon that wording, with the contract to be construed otherwise in its factual matrix (but without regard for the parties' negotiations, or their respective objectives in them).

The legal classification of warranties, however, is an important aspect of their interpretation. Warranties may be:

of opinion: that particular statements are true to the best of the warrantor's knowledge and belief
of past or present fact: that particular facts are true, or
promissory: that particular facts will continue to be true.

Absent very clear language to the contrary, warranties will generally be interpreted as warranting past or present fact.²

Curiouser and curiouser

What then are we to make of the proposed statutory warranty?

What is the necessary past or present fact: that there has been no change, or there has been a change? If the latter, changed from what? A new subpart will require the current employer to provide the intending employer (on request) with employment and employee-related information, which may put a line in the sand as to the 'frozen' terms and conditions, but does not appear to include "the work affected by the restructuring".
At what date is the statutory warranty intended to take effect? Surely this cannot be intended as a retrospective assurance that all past changes have been "with good reason"? In any event, what business is it of courts whether the work affected by the restructuring has changed? That's not a matter of employment, but of commercial service contracts.
Does the proposed amendment exclude the employment institutions – the Authority and the Court – from determining whether any change has 'good reason'? The fact that the warranty is between business buyer and seller, as successful and unsuccessful competitor, rather than between employer and employee, suggests so.
On what basis is any reason to be assessed as 'good'? In an employment context, as limited by what could be achieved by someone acquiring services from a fair and reasonable employer? Or in a commercial context, as making commercial common sense? If the latter, what skills have courts to make the assessment? If the former, why should contracts for commercial services be so constrained? And why should the employment institutions' expertise then be excluded?
In any event, from whose perspective is 'good' to be assessed? Subjectively, or objectively? As a warranty, does the necessary assertion – that any change has good reason – mean that this is a warranty of opinion: that it is the case to the best of the current employer's knowledge and belief? If so, the warranty is breached only if the employer lacked a foundation on which to form that opinion, not that a contrary opinion might or would be held by anyone else.
Or is it a promissory warranty, meaning that – whatever the work affected by the restructuring, and the terms and conditions of employment – any change from the time of giving the warranty will only be for 'good reason'? (See above, for the complications of that assessment.) Does that make this a promissory warranty of opinion? Given that a promissory warranty is of continuing facts, can (or should) there even be such a thing?

What to make of it all?

Perhaps none of this really matters if the provision may be avoided. 'Implied' appears to be a deliberate drafting choice. The Bill elsewhere provides for another warranty, as between employer and employees, but there simply describes it as a 'warranty'.

An 'implied warranty' cannot survive in the face of contrary express terms. So on any restructuring, the agreement between business seller and purchaser could expressly provide that "No warranty is given in terms of s69LC of the Employment Relations Act". That might do the job.

Possibly the drafters intended the 'implied warranty' primarily to operate in circumstances in which there is no relationship between the current and new employers (i.e. in subsequent contracting scenarios where the outgoing employer has no contractual tie with the incoming employer), yet the incoming employer is fixed with its predecessor's employment arrangements. But, if so, then to what is the 'warranty' collateral? It might not be effective.

The problem with all of this is that it seems an extraordinary length to have to go to avoid the imposition of, or to enforce, indeterminate and ambiguous statutory obligations in circumstances as common as business acquisitions or new contracting arrangements.

If losing parties to contracting arrangements have undermined an incoming contractor's cost structures, some remedy may be justified. But the common law already provides a wealth of remedies for deception in commercial dealings. Is another – of uncertain ambit and utility, purportedly created in pursuit of the Act's objectives, but for enforcement outside the employment jurisdiction – really warranted?

Fortunately Parliament will have the opportunity to re-think this amendment during the committee stages of the Bill and in the course of its subsequent readings.

Thanks to Pheroze Jagose for writing this Brief Counsel.

Footnotes

¹Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd [1989] HCA 6; (1989) 167 CLR 177; Mason CJ and Wilson J, para 24

²Lion Nathan Limited v CC Bottlers Ltd [1996] 2 NZLR 385 (PC), 388-389

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.